The telecom regulator’s recommendations on the reserve price for 2G spectrum auctions appear to be based on flawed assumptions

The telecom industry has been taken aback by the arbitrary, regressive and inconsistent recommendations announced by the Telecom Regulatory Authority of India (Trai) on the auction of spectrum. The recommendations have come at a time when the industry is reeling under a heavy financial burden and there is a strong decline in investor confidence.

It is, therefore, surprising to the industry, that being fully conversant with the industry’s predicament, Trai has come out with a highly retrograde set of proposals/recommendations on spectrum auctions that:

(i) militate against National Telecom Policies;

(ii) are in violation of settled legal principles, judgments of the Telecom Disputes Settlement Appelate Tribunal and the Supreme Court;

(iii) harms consumers;

(iv) jeopardises rural connectivity; and

(v) is certain to harm the financial health of the industry.

On the pricing and methodology adopted, the industry is utterly confused. In May 2010, the regulator set 2G spectrum prices in line with 3G prices as a basic minimum bidding price. In January 2011 we heard that the 900 MHz band should be 1.5 times the 1,800 MHz band. Now in April 2012, the multiplier has become two times.

Further, the known price for 2G spectrum, as allocated by the government as late as in December 2007, was more than 10 times lower than the newly stated price. Also, the recommended reserve price for the 800/900 MHz and 700 MHz bands is two times and four times the reserve price of the 1,800 MHz band, respectively. It is evident that the unreasonably high reserve prices are driven by certain unjustified and irrational assumptions and do not support the viability of the telecom sector. Trai has displayed inconsistency in its proposals, having come out with two different prices for the 1,800 MHz spectrum in the last two years (Rs 1,769.75 crore/MHz in 2010 and Rs 3,622 crore/MHz in 2012). The regulator has not provided any rationale for its recommendations and we are happy that the Telecom Commission has asked for one to understand the basis on which these figures were calculated.

Trai has stated that “liberalisation” of spectrum justifies the higher reserve price. However, the provision of “liberalisation” that is being referred to is completely untenable, since we have been in an acknowledged technology-neutral environment since September 1999.

Also, liberalisation as is being postulated by Trai is totally inconsistent with the policy of technology neutrality and licence conditions. Trai has also not taken into consideration the fact that the supporting eco-system (network equipment, handsets, and so on) of futuristic technology is non-existent at present. The development of a mature eco-system is at least five years away. Therefore, any higher spectrum fee just to change the tag of the spectrum to “liberalised” while it continues to be used for 2G services is totally unjustified.

In fact, it is interesting to note that the latest price derived in the BWA auction in 2010 in the 2300 MHz band for 4G technology (which Trai now proposes to allow under existing spectrum allocation, in the guise of liberalisation) was only Rs 1,284.77 crore per MHz (FDD equivalent) on a pan-India basis. Compare this with Trai’s proposed price of Rs 3,622 per MHz for 1,800 MHz on a pan-India basis.

Trai has wrongly applied the multiplication factor of two for 900 MHz and four for 700 MHz over the reserve price of 1,800 MHz. In its earlier recommendations, including the experts-determined price, the multiplication factor of 1.5 was used to derive the price of 900 MHz with reference to the price of 1,800 MHz. It is difficult to understand how this factor has increased from 1.5 to two when there is no change in the relative propagation characteristics of 900 MHz and 1,800 MHz. In the industry’s view, given the increased cost of spectrum, the cost differential between 900 MHz and 1,800 MHz network, due to infrastructure capital expenditure (capex) and operating expenditure (opex), will narrow significantly. So, the multiplication factor, instead of being increased to 2, should actually have been reduced.

Additionally, Trai has recommended placing only a 5 MHz block of spectrum for auction out of the 110 MHz it has earmarked for auction, while the available spectrum in the 1,800 MHz bandwidth is 581 MHz. Creating this “artificial scarcity” by holding back almost 80 per cent of the available spectrum and deliberately extorting a higher auction price from the industry will eventually hurt consumers, since the higher expenses will be passed on to them.

Trai’s recommendations, if they are accepted, would result in an astronomical price for spectrum, a huge cost of “refarming” (of both capex and opex) and, most importantly, the cost of idle spectrum with the government to be borne by the final customers of telecom services. These are matters that need critical introspection and analysis before the policy is implemented and the industry has asked the government to consider them before taking a decision on the issue.

The writer is Director General, Cellular Operators Association of India